Follow the money

Countering trade-based money laundering

By John A. Cassara, Industry Adviser to SAS Federal LLC

Shortly after the September 11 terrorist attacks, I had a conversation with a Pakistani businessman involved with the underworld of crime. He was involved in the gray markets of South Asia and the Middle East. He said, “Mr. John, don’t you know that the criminals and the terrorists are moving money and transferring value right under your noses? But the West doesn’t see it. Your enemies are laughing at you.”

I had spent much of my career as a Special Agent for the Department of Treasury conducting investigations in the areas of the world where many of our adversaries operate. His words infuriated me because I knew he was right. I knew first hand that our enemies were taking advantage of what Osama bin Laden called “cracks in the Western Financial system.”

One of the primary cracks is “trade-based money laundering.” It involves the transfer of “value” via commodities and trade goods. In addition to customs fraud, trade-based value transfer is oftentimes used to provide “counter-valuation” or a way of balancing the books in many global underground financial systems – including some that have been used to finance terror.

... some experts believe the majority of US money being laundered abroad is moved out of the country via undervalued exports.

What is trade-based money laundering?

The Financial Action Task Force (FATF) defines trade-based money laundering (TBML) as the “process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.” According to the U.S. State Department, this practice has reached “staggering” proportions in recent years. As a global problem, it is difficult to quantify, but some experts believe the majority of US money being laundered abroad is moved out of the country via undervalued exports. The US Department of Treasury estimates that the Black Market Peso Exchange, a TBML methodology found in the Western hemisphere, launders billions of drug dollars every year.

Criminal and terrorist groups that abuse trade are assisted by a number of factors:

The massive amount of global trade that takes place daily.

Financial diversity (i.e. the wide variety of financial controls found in different countries, the diverse financial arrangements made between governments, and the innumerable types of financial deals found in international commerce).

The co-mingling of legal and illicit funds and trade items.

A low risk of detection.

Limited government understanding and resources .

How does TBML work?

Trade-based money laundering scams take a wide variety of forms. For example, it could be a simple bartering or a commodity for commodity exchange. In certain parts of Afghanistan and Pakistan the going rate for a kilo of heroin is a color television set. Drug warlords exchange one commodity they control (opium) for others that they desire (luxury and sports utility vehicles). However, generally speaking, money laundering through simple invoice fraud and manipulation is most common. The key element of this technique is the misrepresentation of the trade good in order to transfer value between importer and exporter. The quantity, quality, and description of the trade goods can be manipulated. The shipment of the actual goods and the accompanying documentation provide cover for “payment” or the transfer of money.

Invoice manipulation made simple:

It is important to understand that when a buyer and seller are working together, the price of the item can be whatever they want it to be. As long as parties in an international trade transaction do not get too greedy and cause noticeable trade anomalies, their chances of detection by bankers, customs services, law enforcement and other authorities are miniscule.

The US law enforcement and intelligence communities agree that one of the most effective counter-measures against organized crime, terrorists, systematic corruption, fraud and many other types of serious crime is to 'follow the money trail.'

Customs and law enforcement investigations have demonstrated that the most effective way of combating TBML is to analyze imports and exports between countries. For example, the chart (click to enlarge) shows the fluctuating value associated with thousands of refrigerators exported from Country A to Country B. The dark color represents the declared value of the refrigerators upon export from Country A, and the light color represents their declared value upon arrival in Country B. The horizontal line represents time and the vertical line represents value. In this example, the data came from the respective countries’ customs services. Obviously, the declared export price should match the declared import price (with some recognized variables). In this case, the difference between the peaks and the valleys or the difference in price between the dark and light colors (declared imports and exports) represents the transfer of value in the form of refrigerators. In this case, the value transfer represented by the shipments of refrigerators masked the laundering of the proceeds of narcotics.

Countermeasures

Every country has a customs service and tracks what comes in and what goes out. In fact, in many parts of the world, customs duties are the primary source of government revenue. So although there are differences in the way governments gather and store trade data, enough similarities exist to conduct effective analysis and TBML investigations. Such investigations require three basic elements:

Access to import and export data. Moreover, if the trade data can be augmented by combining it or overlaying it with other data such as financial, travel, commercial, law enforcement, etc. following the suspect activity will be further enhanced.

The ability to promptly exchange data (adhering to standard international safeguards and privacy concerns) with other countries.

Expertise in analyzing and investigating TBML.

Recognizing the growing threat of TBML, in 2004 the Department of Homeland Security’s Immigration and Customs Enforcement (ICE) established the world’s first trade-transparency unit or TTU. Subsequently, other TTUs have been created in Argentina, Brazil, Paraguay, Colombia, Panama, Mexico and other countries. As demonstrated above, by comparing one country’s targeted imports or exports against the corresponding data of another country, trade anomalies can be detected that could be indicative of customs fraud, tax evasion, contraband smuggling or trade-based money laundering. This data could even be the back door into underground financial schemes including those linked to terror finance. Of course, data analysis will only go so far. Investigations in the field are also needed.

Conclusion

The US law enforcement and intelligence communities agree that one of the most effective counter-measures against organized crime, terrorists, systematic corruption, fraud and many other types of serious crime is to “follow the money trail.” In the years to come, using sophisticated data analytics, we will increasingly learn to “follow the value trail."